On the other hand, the same Section provides that if the failure to file the required tax return is not due to
willful neglect, a penalty of 25% is to be added to the amount of the tax due from the taxpayer.
There being no cogent basis to find willful neglect to file the required tax return on the part of the private
respondent, the 50% surcharge or fraud penalty imposed upon it is improper. Nonetheless, such failure
subjects the private respondent to a 25% penalty pursuant to Section 72.
INTEREST
As for the interest which the private respondent is liable to pay, We find the 42% interest assessed by the
petitioner to be in order. At the time the tax liability of the private respondent accrued, Section 51 (d) of the
tax code, before it was amended by Presidential Decree No. 1705 12 prescribed an interest rate of 4% per
annum, provided that the maximum amount that could be collected as interest on the tax deficiency will
not exceed the amount corresponding to a period of three years. Thus, the maximum interest rate then
was 42%.
DEFICIENCY
Section 51 (e) (2) shows that this interest is in addition to the interest provided in Section 51 (d). This view
can be gleaned from the use of the phrase "Where a deficiency, or any interest assessed in connection
therewith under paragraph (d) of this section" in Section 51 (e) (2). The additional interest is to be
computed upon the entire amount of the tax liability (previous interest included) which remains unpaid.
This is manifested by the use of the phrase "there shall be collected upon the unpaid amount as part of
the tax" in Section 51 (e) (2). However, the same Section provides that the maximum amount that may be
collected as interest cannot exceed the amount corresponding to a period of three years. In this case, the
maximum rate would be 60%.
SURCHARGE
An examination of Section 51 (e) (3) reveals that this surcharge is imposed for the late payment of the
unpaid tax deficiency and/or unpaid interest assessed in connection therewith, in addition to all other
charges. This is confirmed by the use of the words "there shall be collected in addition to the interest
prescribed herein [referring to the entire Section 51 (e)] and in paragraph (d) above [referring to Section
51 (d)]." The additional surcharge is computed on the amount of tax unpaid, exclusive of all other
impositions. This is confirmed by the phrase "ten per centum of the amount of tax unpaid." The failure to
pay the tax deficiency within the required period of time upon demand is penalized by this additional
surcharge. Upon such failure to pay, the surcharge is automatically due; its imposition is mandatory. 13
Under the aforementioned provisions of the tax code, the private respondent became liable to pay the
additional interest provided in Section 51 (e) (2) and the 10% surcharge provided in Section 51 (e) (3)
thirty days after February 20, 1981, the date when the Commissioner of Internal Revenue sought the
payment of the deficiency. More than three years have passed since and yet the account remains
unsettled. Thus, the additional interest and surcharge can be imposed on the private respondent as
asserted by the petitioner. Presidential Decree No. 1705 took effect on August 1, 1980. It was, therefore,
the law in effect when the additional interest and surcharge could be legally imposed on the private
respondent.
The three-year or 60% maximum interest provided in Section 51 (e) (2) calls for application. It is
computed against the total amount unpaid by the private respondent.
WHEREFORE, in view of the foregoing, the Decision of the Court of Tax Appeals in CTA Case No. 3441 is
hereby SET ASIDE. The private respondent Air India is hereby ordered to pay the amount of P235,374.94
as deficiency tax, inclusive of interest and surcharges. We make no pronouncement as to costs.